Business and management

Exchange mergers

April Fools?

IT WAS widely anticipated, and it is widely suspected of being folly. On April 1st NASDAQ OMX and IntercontinentalExchange (ICE) jointly launched an unsolicited takeover bid for NYSE Euronext, which runs the New York Stock Exchange, a big derivatives market and various European bourses. The swoop is designed to foil a friendly tie-up between NYSE and Frankfurt-based Deutsche Börse, announced in February.

The interlopers are proposing a carve-up. Atlanta-based ICE would get most of the target's derivatives businesses, including NYSE Liffe. New York-based NASDAQ would take the stock exchanges and the American options business. The new offer was billed as “A Superior Alternative for Global Markets: Growth, Competition and Stockholder Value” (PDF). There are, however, good reasons to doubt its superiority on all three counts. Indeed, it has a whiff of desperation about it. With global exchange consolidation well advanced, juicy opportunities are hard to come by these days. Fear of missing out, and thus the temptation to overpay, is growing.

NASDAQ and ICE knew they would have to offer substantially more than the Germans to have a chance of succeeding. At 19% above Deutsche Börse's offer and 27% above NYSE Euronext's share price before that deal, the hostile bid is certainly generous. Can it really be worth that much to anyone?

Sceptics have plenty of ammunition. Exchange mergers may be in vogue again—on top of all the drama in New York, Sydney is looking to fuse with Singapore, and London with Toronto. But the industry's record when it comes to making deals work is ropy. The “revenue synergies” promised in cross-border mergers have proved particularly elusive, given the stubbornly local nature of regulation. The only proven way to make one and one add up to two or more in this industry is through cost savings.

There is, to be sure, plenty of overlap between NASDAQ and its crosstown rival. And Bob Greifeld, NASDAQ's chief executive, is a master of the art of crunching together trading platforms' back-end technology to improve efficiency. Even so, this is a big ask. And the prospect of heavy job losses in New York could undermine one of the professed advantages of the new offer: that it will appeal more to politicians, who still treat exchanges as assets of strategic importance, because it keeps the NYSE in American hands. (That said, some in Washington might buy the guff about the deal “strengthen[ing] the international competitive position of the US.”)

There are regulatory hurdles, too. A merged NASDAQ and NYSE would have 50% of the share-trading market in America, raising antitrust concerns—though established exchanges have been rapidly losing market share to upstarts such as BATS and Direct Edge, thanks to deregulation and technology advances.

A bigger worry is the market for listings, in which the combined entity would enjoy a monopoly in America. This business is quite lucrative, with larger companies paying hundreds of thousands of dollars a year for listing, stock surveillance and other services. Public companies are more willing these days to shop around for listing venues, including overseas. Even so, NASDAQ's argument that regulators should view this market globally, not in national terms, rings a bit hollow given how ferociously it competes for listings with the NYSE. (It should be said that the German deal has antitrust issues of its own in Europe, where there is intense scrutiny of its possible dominance in listed derivatives and clearing.)

Another concern, for NASDAQ shareholders, is that in taking the cash-equities bit of NYSE Euronext it would be greatly increasing its exposure to the least promising bit of the exchange business. Margins are bigger in derivatives, especially for those with their own clearing houses. Analysts are likely to conclude that the deal is better for ICE than for its partner.

Others fret that Mr Greifeld is a little too keen to do a headline-grabbing deal and that, having tried and failed to buy the London Stock Exchange a couple of years ago, he is prepared to over-bid for another trophy. An enthusiastic long-distance runner, he seems to believe that with NYSE Euronext in tow he can stretch far enough ahead of rivals in share trading and listings to ensure a bright future. But he is taking a dangerous gamble—and he might just lose whatever the outcome. If the bid flops, he will have cemented his reputation as a failed dealmaker. If it succeeds, it may come to be seen as an expensive mistake.

Readers' comments

How often do big mergers work out ? But think of the loss of Wall Street jobs if the fashion cycle of merge-and-split, acquire-and-divest, were to end ? Besides, the CEO doesn't get his puss on the covers of all the business magazines just by running his company well.

And a Gamble it is! This latest craze in merging stockmarkets is only profit drivin. The creation of corporate identies/monopolies in the interests of efficiencies is one thing but just for profit and becoming too big to fail is another. Regulators beware, unless you are part of this craze.

What other motives are driving these mergers? Quick profits and tax evasion are only the tip of the iceberg ! Is the tail wagging the dog? Are the stock markets dictating where/how monies should flow to societies industrial/service industries. Is society going to learn from our past experience with Investment Bank morals? Gone are the days when companies resisted share dilution/frequent computer model trading in the interests of their true share holders, (people who see a company product/idea as good). DO YOU UNDERSTAND???
If you owned or ran a company you might understand. Real businesses are not to be treated as commodities like GOLD /OIL, which is what stock market mentality is doing. Often businesses cannot reach true potential because of the financial stock market mentality.
Saying the only thing that is for sure is change itself is one thing but this reality has turned into change for the sake of change is just. We believe this casino mentality has corrupted the stock markets and exchanges. Wasting societies resources in the name of providing profits for "the few" is what these mergers will do. Please read Bail Out Nation.

Britain and the U.S. adopt a very Nationalist policy about their stock exchanges. When Deutsche Börse tried to buy the LSE the Nationalist shareholders, including British politicians, did their job.

Something similar now that Deutsche Börse has tried to buy the NYSE even if now Deutsche Börse is much less "German" than when it tried to buy the L.S.E. because as a consequence of Seifert´s openess to British investors, British funds reached control of the German exchange.

So, it looks other "free market" economic only accept an ultra-Nationalist policy when the buyer is German....but when Vodafone bought Germany´s Mannesman they rejected a similar polity.

Now Deutsche Borse, Madrid and Milan should fight back together to buy NYSE and merge themselves.

Also it is possible a Worlwide merger Berlin-Moscow-Shangai-Sao Paulo-Madrid.